Schneider (XPAR:SU) provides electrical products and systems addressing a wide range of industrial, commercial and consumer markets. Key businesses include operations in low-voltage and building automation, discrete and process automation, critical power and cooling, and medium voltage and grid automation. Schneider’s revenues are fairly diversified, with 28% generated in Western Europe, 28% in Asia Pacific, 25% in North America and 19% in the rest of the world.
The market appears to underappreciate Schneider’s potential. Given that emerging markets make up nearly 45% of the company’s sales, some may be worried that potentially slowing economic growth in many developing countries would negatively affect Schneider’s businesses, especially those which are construction-driven. Additionally, the company has shown a penchant for mergers and acquisitions, which can carry risks of overpayment as well as integration and execution uncertainties.
Nonetheless, we believe these risks are more than accounted for in Schneider’s share price. Contrary to market perception, we see a very high-quality business with strong positions in attractive end markets. Unlike those of many other industrial businesses, a number of Schneider’s end markets are still operating below mid-cycle volume and have much room to grow, in our view. The company generates high returns on incremental capital and possesses a reasonably healthy balance sheet with strong free-cash-flow generation. For these reasons, we believe the company offers an attractive risk/reward proposition to long-term investors.
From the Brandes International Equity Fund letter for the year ended Sept. 30, 2015.
